Improving the term structure of interest rates: two-factor models
Version of Record online: 29 APR 2009
Copyright © 2009 John Wiley & Sons, Ltd.
International Journal of Finance & Economics
Volume 15, Issue 3, pages 275–287, July 2010
How to Cite
Gómez-Valle, L. and Martínez-Rodríguez, J. (2010), Improving the term structure of interest rates: two-factor models. Int. J. Fin. Econ., 15: 275–287. doi: 10.1002/ijfe.392
- Issue online: 21 JUN 2010
- Version of Record online: 29 APR 2009
- Term structure of interest rates;
- partial differential equations;
- nonparametric estimation;
- volatility of the short-term interest rate;
- stochastic process
We consider a new approach for estimating the coefficients of the term structure equation in two-factor models. This approach is based on the fact that the risk-neutral drifts of the factors are directly estimated. Therefore, the market prices of risk and the physical drifts do not have to be either identified or estimated.
In order to study the finite properties of this approach, we generate trajectories in a stochastic volatility model. We find that the risk-neutral drifts and the yield curves are more accurately estimated. Finally, we show the supremacy of this approach by means of US Treasury Bill data. Copyright © 2009 John Wiley & Sons, Ltd.